China: Major Problems and, Like it or Not, the Communist Party is Going to Provide the Solution

It is coming up on 15 years since Deng Xiaoping’s famed February 1992 “southern tour” restarted China’s economic reform process, which had been stalled by June 1989

There have since been 15 years of almost continuous rapid growth, 15 years of rapidly expanding exports, foreign investment, market forces and changes in structure of ownership of productive assets.

It would be nice to share the general assumption that this will continue, albeit it at a more sustainable pace than the helter-skelter expansion of the past two years. It would be comforting to believe that the shift to private ownership will continue, that even fewer decisions will be made by government fiat, that the liberalization and entry of foreign firms promised under the terms of China’s entry into the World Trade Organization will continue. It would be even nicer to believe that these economic processes would lead to a dispersal of power away from the party, the growth of a politically engaged middle class anxious for a diversity of opinions, and the emergence of creative and innovative forces in academia and the arts.

Alas, I feel bound to be rather gloomy about the prospect of inexorable progress on these fronts—and for reasons that do not simply reflect the intransigence of the party. The Communist Party of China is still, despite the contradictions of quasi-capitalism, despite greed, corruption and opportunism, in much better shape than the Soviet party was at the equivalent time after the revolution—the Brezhnev era.

The reasons for my pessimism are that for all the faults of where Chinese institutions now are, the Communist Party will see itself as the only power capable of addressing the three critical problems China faces. The party may be right, if only because institutional change has lagged far behind economic change.

What are these problems?

Top of the list is surely the environment. The government is beginning to recognize just how bad things are—and they’re getting even worse at an alarming rate. There is no effective legal structure to bring polluters to book. There is scant sense of public interest at the corporate level, whether companies are controlled by local persons of influence or foreign and Taiwan investors. Local administrations remain fixated on “growth” at almost any cost and many in party and government are simply motivated by personal enrichment. In theory, pricing mechanisms might be used to address the problem. In practice their application in a semi-reformed is too difficult to be of much help.

For those in power the answer will lie not in more reform but in draconian application of what are likely to be crude measures of the One-Child policy type, even at the cost of plant closures, economic disruption and corporate failures. If local administrations are too weak or venal, too bad. Beijing will wave a big stick and county and municipal governments will find that though heaven may still be high the emperor is not as far away as they had thought. A crude but probably effective environmentalism will be at the expense of the rough and ready quasi-capitalism which has been the hallmark of recent years. It may also be grudgingly accepted by the newly modestly prosperous home- and car-owning classes, who are more likely to side with a government emphasizing stability rather than risk jeopardizing their comforts by engaging in politics other than through via the party.

What applies to pollution also applies to water. Even if water ceases to be polluted there will still be a huge shortage, at least in northern China. That might be partly solved by economic means—a huge increase in charges. But at least as likely it will have to be addressed by massive undertakings that only a ruthless central administration can bring about. The choices: even bigger works to divert water from surplus regions in the center and south to the north, the seat of political power. Or a conscious decision to shift more and more economic activity southwards, to speed up depopulation of rural areas in the north where labor productivity is low and the water table is falling to dangerously low levels.

Next is the problem of income maldistribution. This of course cannot be “solved” as to a large extent it is a product of growth. But its extreme level in China has to be addressed if the party is to retain any claim on the mandate of heaven. In turn, that means stepping back from “privatization” in its recent form of enabling officials to get rich quick by acquiring state assets on the cheap. This is a massive source of corruption and politically the most dangerous aspect of wealth imbalances. Secondly, some imbalances can only be addressed by increasing the tax-and-spend role of the central government, at least to try to make up for the decline in health and education services for the lower income groups, and increase in transfers to poorer regions. Higher taxes and making state enterprises pay out more dividends will be needed to finance this.

In turn that will impact the speed and direction of economic growth. Even in advanced capitalist societies, the need to play a role in income distribution has almost always involved an increase in state power. It is doubly so in one-party, supposedly socialist China.

One avenue to help redistribution and urbanization would be to give peasants title to the land they till. But this has been resisted by the party even as its members got rich from privatizing other state assets. That prospect is now receding further.

China will be addressing these mega problems at a time when the external environment will likely be much less favorable than over the past 15 years. One doesn’t have to predict a global trade war or a serious hiatus in China-U.S. relations to predict that export-led growth will soon be a thing of the past. The west, already deep in debt, cannot absorb any more without eventually reneging on its already vast debts to the East.

New markets in the developing world do exist but other developing countries want their share and are already putting up barriers against China. As none have the ability to print money to pay for imports as does the US, they need to export before they can import.
The very easy global monetary policies from which China has also been benefiting cannot continue without spurring inflation at 1970s levels. The cause and effect of coming changes in the global trade and investment environment will mean a sharp fall in the level of foreign investment.

As the role of the external driver fades, the role of the state will increase again. Do not forget that for all the fuss in the stock-market flotations of Chinese banks, insurers and other giant enterprises—not to mention the outlandish profits of investment banks—most of these are state-owned and ultimately subservient to the needs of the government and party.

Shifts have begun already: the crackdown on foreign media, opposition to some foreign takeovers, increased doubt about WTO commitments. All this is happening even while the external environment remains positive. Just wait till it turns negative.

China cannot solve its problems in ways that might work in Japan or the west for the simple reason that its notion of property rights is still ill-developed. Lack of well-defined property rights both enables the government to act arbitrarily and sometimes makes it essential that it does so—because the institutions are not in place to make other mechanisms work.

One can hardly blame the government for this. Fifteen years since the southern tour, 30 years since the death of Mao, is a short time to undo the past and create a new system. All one can say with hindsight is that by forcing the pace of growth to the exclusion of the environment and income distribution, the government has sown the seeds of a reaction to the policies Deng set in motion.

Likewise China’s current excesses of personal greed can be seen as a reaction against the forced and phony communalism of the Mao era. Reaction against today’s excesses is more likely to take the form of increased authoritarianism and nationalism than steady progress to Scandinavian-style socialism.

Pbowring@asiasentinel.com

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